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March 28, 2008

News for 28 Mar 2008

- Lehman traded lower yesterday by 8.9% to $38.71 on rumors that the firm is "short on cash".  Keep in mind this same type of rumor and corresponding sell-off happened with Bear three weeks ago.  I'm not saying the same is going to happen with Lehman but I am saying taking caution in trading this name. The shares have fallen 41% percent this year amid the $200 billion in industry-wide losses.  I wouldn't be surprised to see more weakness in this stock over the next week or so. 

- The number of bearish put options traded on Lehman's stock exceeded call options by 3-to-1 and put volume in the first three hours of the day topped the daily average of the past 20 sessions. This is a very bearish sign with respect to investor sentiment as it applies to LEH.  Puts are generally bought by people who believe that the stock will go down in value while calls are usually a bet on the upside.  In this case, people were buying puts "hand over fist."

- Lehman's response to the trading action: "There are a lot of rumors in the marketplace that are totally unfounded,'' Cohen said in a telephone interview with Bloomberg yesterday. "We are suspicious that the rumors are being promulgated by short sellers of our stock that have an economic self interest.'' 

- And here's an interesting note reported by Bloomberg that dissects a huge put trade today:

A so-called bear spread of almost 20,000 Lehman options contracts traded at 9:51 a.m., according to traders and Bloomberg data. An investor using the strategy buys puts while simultaneously selling them at a lower strike price. The position reduces the overall cost of the trade and also caps the total potential profit if the stock falls.

When the Lehman spread traded, the stock was at $42.05, down 1 percent from the previous close. Thirty-five minutes later, the shares had plunged 8.3 percent to $38.55.

- Hmmm!  Sounds like some traders are going to get burned.  Its been my experiences that more times than not, when people take a huge "speculative, rumor-based, negative" position like this...they usually lose.  This is action that great to watch but I wouldn't dare engage into.  This one will be fun to see unfold.

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Conviction List

  • BUY Goldman Sachs (ticker: GS)
    Recent Px: $180
    12 Mo. Target Px: $230
    Goldman Sachs is a "best of breed" firm that prints money like no other on Wall Street. Trading at 9 times next years earning there is no reason to see this stock going lower than recent volatility has suggested. Recent earnings announcement surpassed analyst expectations. I would expect them to continue doing so. Buying in the 160s or lower would be a good buy.

    SELL Bear Stearns Corp. (ticker: BSC)
    Recent Px: $10
    12 Mo. Target Px: N/A
    JP Morgan got a heck of a deal and even felt bad about their initial offering price that they raised the bid from $2 to $10 per share. I guess it always possible that the deal falls apart and other outside bids are submitted but not without losing their building. Its a virtual lock at this point. Therefore, I think its time to look elsewhere.

    BUY Ultra Petroleum (ticker: UPL)
    Recent Px: $78
    12 Mo. Target Px: $100
    Ultra Petroleum's knack for oil and gas exploratory success makes this name a "must have" in the portfolio. This Houston-based firm has interests and business in Green River Basin, Wyoming, and offshore China.

    BUY iShares China 25 (ticker: FXI)
    Recent Px: $145
    12 Mo. Target Px: $175
    Chinese economist have forecasted a 11% growth in GDP for this year...and that comes on the heels of a slowing US economy. One word: "WOW!"

    BUY Dow Jones Ultra 200% Index (ticker: DDM)
    Recent Px: $70
    12 Mo. Target Px: $88
    Goldman superstar Abbey Cohen has predicted that the DJIA will see 14700 this year. With that logic and her call in mind, then consider using the 2:1 magnification etf that is based on the Dow's performance.

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